Company Overview: Probiotec Limited (ASX: PBP) is a manufacturer, packer, and distributor of a broad range of drugs and OTC pharmaceuticals. The company is listed on the Australian Stock Exchange (ASX) since November 2006 and is known for the development of innovative new pharmaceutical, nutraceutical, and cosmeceutical products. PBP holds three manufacturing amenities in Australia and provides its products both domestically and internationally. The company drives growth both organically and via acquisition by focusing on innovation, quality systems, and customer service.
 

 PBP Details

 

PBP Rides on Synergies from Acquisitions and Robust Organic Growth: A leading Australian pharmaceutical company, Probiotec Limited (ASX: PBP) is mainly engaged in production, manufacturing, and distribution of a broad range of medicines and over-the-counter (OTC) pharmaceuticals.  In 2019, the company saw a continuation of the execution of its strategic plan, which was outlined in 2017. The year also marked the settlement of the sale and leaseback of PBP’s main facility in Laverton North, along with the beginning of construction of a new warehousing facility as indicated last year. In addition, the company outlined various structural changes, which included the successful sale of the remaining brand, Celebrity Slim, while retaining manufacturing on a long-term contract. The outcome of these operational changes aided the company to offer a special dividend, and thereafter a share buyback, to enhance value for its shareholders.
 
In FY19, the Group’s revenue from continuing operations increased 19% year over year, backed by growth from both existing and new customers, with additional new work coming on board over the second half of the year. The company’s vision involves delivering the highest quality products to its clients with exceptional customer service. The company is well-positioned to enhance its capabilities in the market and continues to experience robust levels of sales inquiries, leads, and contracted work. The demand for the company’s manufacturing services and product development capabilities continues to grow, thereby boosting orders.
 
In the first half of FY20, PBP delivered sales revenues of ~$44.1 million, an increase of 34% year over year. The company’s organic revenue increased 17% on pcp, driven by growth from existing and new customers. This growth was supplemented by the acquisition of ABS during the half year. An aging population, increasing life expectancy and the shift of patient care towards lower cost settings, have fuelled the demand for healthcare services. Further, increasing awareness and desire for high quality Australian made products are driving the need for a portfolio of quality products and experienced management team. PBP has grown to meet these increasing requirements.
 
During 1HFY20, the company acquired ABS (Aus) Pty Ltd, a leading pharmaceutical and consumer product contract packer operating for more than 40 years. Notably, PBP purchased business assets from Contract Pharmaceutical Services of Australia Pty Ltd (“CPSA”) in December 2019. Both these acquisitions were in line with PBP’s strategy to strengthen its market position as a leading pharmaceutical company.
 
Over the period of past four years, covering FY15 to FY19, PBP witnessed a top-line CAGR of ~25.9%. Basic earnings per share stood at 11.7 cents per share in FY19, as compared to a loss of 46.7 cents per share reported in FY15. A final dividend of 2.5 cents per fully paid ordinary share was declared for the financial year ended 30 June 2019. This trend is expected to contribute further growth in FY20.
 

Sales, EBITDA, Dividend Trends (Source: Company Reports)
 

Robust Organic Growth (Source: Company Reports)
 
Going forward, PBP remains confident about the outlook for FY21 and beyond, as it is witnessing higher recognition from its customers in relation to PBP’s industry-leading supply performance amid the COVID-19-led disruptions. In addition, the company is taking necessary measures to ensure the continuity of supply of critical medicines to address client requirements.
 
Further, the company remains well placed to manage the rising cost pressure. In lieu of these positives, the company reiterates its FY20 outlook and continues to expect revenues exceeding $100 million and EBITDA to be in the range of $16 million to $17 million. It also expects FY20 to benefit from new contract work, organic growth, and new product growth from existing customers. Synergies from ABS buyout, along with cost savings and operational efficacy from the development of 85 Cherry Lane remains a key positive, going forward.
 
Sneak Peek at 1HFY20 Key Financial Highlights: During the six months ended 31 December 2019, the company reported total sales revenue amounting to $44.1 million, up from $33.03 million reported in the year-ago period. Underlying EBITDA for the period skyrocketed 68% from the prior corresponding period and came in at $6.2 million. Underlying NPAT for the period stood at $2.4 million, indicating an increase of 85% year over year. Net profit after tax on reported basis came in at $1.8 million, up 65% on pcp. Underlying earnings per share increased 92% year over year and came in at 3.7 cents. During the period, the board declared an interim dividend at 1.5 cents per share.
 

1HFY20 Key Highlights (Source: Company Reports)
 
Balance Sheet & Cash Flow Highlight: The company exited the period with a cash balance of $8.37 million. The company’s total borrowings at the end of the period came in at ~$12.1 million. Operating cash inflow in 1HFY20 came in at $8.3 million, which includes transaction costs of ~$1m, benefitting from late customer receipts from the prior year. During the period, the company raised capital amounting to $10 million, partially deployed for CPSA asset acquisition. PBP remains well-positioned for future growth, on the back of significant capacity at all sites following increased CAPEX spend in prior years, which is expected to decrease in future years in the absence of major growth projects.
 
Recent News: Recently, the company stated that Jonathan Wenig, a director of the company, has acquired 47,500 fully paid ordinary shares for a consideration of $1.90 per share. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 47.66% of the total shareholding.
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: In 1HFY20, the company had an EBITDA margin of 10.3%, higher than the Dec’18 figure of 7.1%. Operating margin and net margin for the period stood at 5.7% and 4.1%, higher than the Dec’18 figures of 4.7% and 3.3%, respectively. In 1HFY20, current ratio stood at 1.76x, higher than the industry median of 1.69x.
 
 
Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks PBP is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. The company has a debt-loaded balance sheet. As of 31 December 2019, total debt stood at $39.6 million while cash and cash equivalents amounted to $8.37 million.

 
Future Expectations: PBP remains well recognized, with all its manufacturing and packing sites and remaining fully functional throughout the COVID-19 led crisis. Further, it is taking the essential actions to manage the current situation and continues to trade firmly despite these tough periods. The company also stated that it has observed an increased level of need and uplifts in orders, relating to cough, cold & Flu, and immunity products. The increased level of demand for these products is likely to continue through the first half of FY21.
 
Going forward, the company plans to make higher investments to deliver high quality products to its clients with exceptional customer service. PBP continues to focus on cost control measures, while investing to support its growth outlook. The company is also taking necessary measures to grow organically in the short term, improve operational efficacy, thereby striving to be Australia’s largest pharma contract manufacturer and packer. Eventually, the expenses incurred to support these strategic initiatives are likely to result in new sources of revenue for the company in near future.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)


Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of the company generated positive returns of 12.34% in the past one year but went down by 1.66% in the past one month. At the CMP of $1.875, the stock of the company has an annual dividend yield of 2.25%. The company has a market capitalisation of ~$132.73 million and ~74.78 million outstanding shares. Currently, the stock is trading below the average of its 52-week high and low level of $2.480 and $1.495, respectively, proffering an opportunity for share accumulation. Considering the recent developments, optimistic outlook for FY21 and beyond, acquisition synergies and current trading level, we have valued the stock using P/E multiple based illustrative relative valuation method, and arrived at a target price of low double-digit growth (in percentage terms). For the purpose, we have taken peers such as Clinuvel Pharmaceuticals Ltd (ASX: CUV), Mayne Pharma Group Ltd (ASX: MYX) and Opthea Ltd (ASX: OPT). Hence, we recommend a “Buy” rating on the stock at the current market price of $1.875, up 5.634% on 17 June 2020.

 
PBP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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